Stockton bankruptcy first step likely

STOCKTON - The City Council on Tuesday is expected to take its first step toward filing for bankruptcy in a dramatic move to remedy Stockton's crippling finances.

Scott Smith

STOCKTON - The City Council on Tuesday is expected to take its first step toward filing for bankruptcy in a dramatic move to remedy Stockton's crippling finances.

If bankruptcy ultimately happens, Stockton would be the nation's largest city to fall into Chapter 9 protection.

While city administrators remained silent on any plans, it became an open secret Wednesday. The Downtown Stockton Alliance board of directors in a public meeting discussed the city's bankruptcy timetable.

Also Wednesday, the San Joaquin and Calaveras counties Central Labor Council distributed an email, alerting its members that Stockton plans to begin the process at next week's council meeting. The email also invites its members to a meeting Monday to map their strategy for opposing bankruptcy. They won't be alone.

Councilman Dale Fritchen said he's ready to mount an outright opposition because, he said, bankruptcy would cost the city millions in legal fees, drive down property values and discourage new businesses.

"I truly believe this is not the right path at this time for Stockton," Fritchen said. "We're starting to come out of the economic rut we've been in. We're starting to see some light."

Before successfully filing, city leaders must make a series of key moves.

They have to decide if they will engage the city's major creditors in a 60-day mediation period required by a new, labor-backed California law that is designed to help cities dodge bankruptcy.

The City Council is expected to vote Tuesday on if it will launch that process. Eventually, a federal bankruptcy judge has to sign off on any restructuring plan, which the courts do not always grant.

Vallejo recently emerged from bankruptcy. But it cost that city $7 million in legal fees. Stockton is much larger and stands to pay its lawyers almost three times that amount, Fritchen said.

"Do we really want to spend $20 million to fill a $10 million hole?" he said. "That (money) will have to come out of city services."

Vallejo is the 50th largest city in California; Stockton is 13th.

Stockton has been in a financial free fall triggered by the nation's economic crisis that began in 2008. The city has had the dubious distinction of being one of nation's leaders in home foreclosures.

City leaders have long considered bankruptcy as a potential remedy. Layoffs and budget cuts have already been implemented, leaving few other places to reduce funding. In June, the council adopted a $603 million city budget after cutting $37 million.

The City Council has twice - in mid-2010 and mid-2011 - declared a fiscal emergency, enabling it to take drastic measures with its union employee groups.

Fritchen said City Manager Bob Deis is driving the push toward bankruptcy to give Stockton cover from debtors and to allow the city to go after health-care benefits for city retirees - two major drains on finances.

"We are the policy makers," he said. "We give direction to staff. That's not what's happening."

Late Wednesday, the city published its agenda for the upcoming meeting, but with no mention of a vote to launch the mediation process. That item is expected to be added to the agenda Friday.

Councilman Elbert Holman said he hasn't made up his mind if he is for or against bankruptcy. He will do what is best for the city, even if that includes declaring bankruptcy.

"If that's what it takes, I'm open to exploring that too," he said. "I'm going to look at everything."

Vallejo - population 115,000 - is the largest city to declare bankruptcy when it did so in 2008. Vallejo city leaders said the inability to pay pension obligations prompted the decision. A federal judge released Vallejo from bankruptcy Nov. 1.

Two counties in the United States - Orange County in 1994 and Jefferson County, Ala., last year - declared bankruptcy. Those two Chapter 9 filings were by far the largest in U.S. history.

Officer Steve Leonesio, president of the Stockton Police Officers' Association, said he welcomes a mediation process, but he dislikes the bankruptcy option, which would most benefit outside lawyers.